Posts Tagged ‘Iceland’

The US Social Security Administration (SSA) has published, since 1937, very useful periodic reports on “Social Security Programs Throughout the World“. I often consult these volumes for information on specific countries. For the first time, I decided to use these reports to examine changes, over time, in the number of countries with universal pensions.

The SSA consistently describes Iceland’s basic old-age pension as a “universal pension”. In an article published in World Development (January 2007) p. 38, I classified Iceland as a country with “recovery-conditioned” basic pensions, i.e. pensions that are clawed back from other income that otherwise qualified applicants declare. This is a form of income-testing, so such a pension is clearly not universal. It is subject to an income test, in addition to the usual age and residence tests.

Nonetheless, nearly all sources, including the Government of Iceland, describe the pension as ‘universal’, most often with no explanation.

Determining factors in old-age pension are duration of residence in Iceland and income. Pension rights are calculated pro rata according to periods of residence, minimum is 3 years and maximum 40 years. Old-age pension for a single person after 40 years of residence: Full basic old-age pension (grunnlífeyrir) for a single person after 40 years of residence is ISK 297.972 (Euro 3,401) per year. Reduced when annual capital or income from work criterion exceeds ISK 2.056.404 (Euro 23.475) and withdrawn when it exceeds ISK 3.049.644 (Euro 34.813).

An income test exists, so it is not true that there is “no means test” for this pension. The annual €3,401 benefit (€285 a month) is clawed back from annual income in excess of €23,475 (€1,956 a month) at the rate of 30%. This is a very small pension for such a high-income country as Iceland (the figures are for 2010), and it is clawed back from those who have other pension income and/or continue to be gainfully employed in old age. I would like to know what proportion of older persons in Iceland are affected by the clawback, but such information is not readily available.

I conclude that the pension is not universal, and fail to understand why it is described as such. For age pensions, the term ‘universal’ is frequently used as a synonym for ‘non-contributory’. This is a constant source of confusion, for it becomes difficult, if not impossible, to distinguish means-tested pensions (which are very common) from universal minimum pensions (which are less comon) and truly universal pensions (which are quite rare).

That concludes my rant of the day. I am upset because loose use of the term ‘universal’ makes my work more difficult.

Iceland was one of the earliest and largest victims of the global financial crisis of 2008. Much has been written of the fact that the small (population 320,000) country devalued its currency sharply, and refused to bail out its recently privatised banks.

But how well is Iceland doing today? Aggregate GDP data (see chart below) reveal only part of the story. FT Nordic Correspondent Richard Milne looks at the human dimension with interviews of seven Icelanders: an author, a businessman, a member of parliament, a government minister, an academic, a banker, and a human rights lawyer.

The most positive interview is that of the academic:

[Stefán Ólafsson,] professor of sociology at the University of Iceland credits the government with sheltering the worst-off in society. Like many in the Nordic country, he refers frequently to Ireland, seen as the polar opposite to Iceland for rescuing its banks while Reykjavik, reluctantly at first, allowed its own banks to collapse.

Disposable income for the poorest 10 per cent of workers fell by 9 per cent in Iceland after the crisis and by 26 per cent in Ireland, according to his figures. At the same time, the richest 10 per cent saw their income drop 38 per cent in Iceland and rise by 8 per cent in Ireland.

He praises the attempts to bring some of the richest Icelanders – former bank executives and so-called Viking Raider businessmen – to criminal trial for their role in the crisis. “Whether they will get sentences or not is not the most important thing. Going through the process, that is so important. Otherwise we would have felt everything was rotten and corrupt,” he says.

The other six interviews are less upbeat, emphasising the huge consumer debts that Icelanders are struggling with. Some consumers borrowed in local currency, but their debt was indexed to prices, so increased in value while wages stagnated. Others borrowed in foreign currency, so faced sharply increased borrowing costs when the Icelandic krona fell by 50% against the euro in the aftermath of the crisis.

Read all seven interviews for a glimpse into the social impact that the financial crisis had on this island nation.

Tags: Iceland Posted in Finance | Comments Off on Iceland’s recovery from the banking crisis

Iceland in 2008 was the first country to be hit by the global financial crisis, yet we now hear little about the country. Why? Primarily because it has fared better than Ireland, Spain and other countries that followed. Tiny Iceland (population 320,000), defying conventional wisdom, adopted what turned out to be wise policies following the spectacular collapse of its bloated banking sector.

While everyone else rushed to give taxpayers money to the banks, Iceland let them fail. While the bankers at the heart of the crisis were protected and in some cases rewarded in the US and Europe, in Iceland they were jailed and while the rest of Europe embarked on a social spending slashing binge, Iceland expanded its social safety net. At the time, the consequences of these unconventional policies were warned against by many economists, who predicted punishment from global credit markets leading to bankruptcy and economic Armageddon. This has not been the case. ….

The message to take from Iceland’s experience is that contrary to what the majority of policy makers keep preaching to the public about austerity being the only way forward, there is a clear and credible alternative. While Iceland’s road to recovery will not necessarily be repeated to the same extent in other economies, due to the uniqueness of its crisis, its stance on several key policy decisions can be adhered to. Iceland’s policies centred on protecting its people, assisting indebted households and holding those responsible for the crisis to account and this has rescued its country from economic disaster.

The population of Iceland has refused – for the second time – to pay the minimum guaranteed deposits of UK and Dutch depositors in its failed Icesave high-interest accounts. This would have reimbursed the governments of the UK and Netherlands for unilaterally compensating savers in Icesave, the failed Icelandic bank operating accounts in these two countries. ….

The refusal does not seem to be based on cold and rational economic calculations. After all, the amounts of money are small, even for a country the size of Iceland.

The reasons for the refusal were essentially emotive. The population, by 60% to 40% with a high turnout, rejected the agreement because they refused to have ordinary people meet the obligations created by a failed private bank. ….

Icesave … arose from an Icelandic bank (Landsbanki) taking advantage of weaknesses in European financial regulations to provide high-interest deposits in the UK and Netherlands under the name of Icesave. By the time Landsbanki collapsed in the fall of 2008 it had been one of the riskiest banks in the world for quite some time, resorting to high-interest savings accounts since other avenues for raising funds were closed.

European financial regulations are ambiguous by design. One lesson of the Icesave rejection, the authors cautiously conclude, is “Europe might be better served if European policymakers were more explicit about how the financial system is supposed to operate”.

In the space of a few days last October Iceland’s whole banking system collapsed and was taken into public ownership, including the three banks which went from nowhere in 2002 to rank among the world’s 300 biggest by 2007. These three now make it into a less glorious league – Moody’s list of the 11 biggest financial bankruptcies in history. The country’s average income fell from 160 per cent of the US’s in 2007 to 80 per cent this year.

Yet, walking around Reykjavik and other cities this summer, one sees no signs of economic distress. The country looks amazingly prosperous. Traffic density has fallen a little, but only to 2005 levels. Unemployment has risen to 8 to 9 per cent, nearly twice the previous postwar record – but is still below that of several other high-income countries. Applications for free food from charities have increased, but numbers remain small. Four out of five households have been affected only at the margins.

That is the good news. The bad news is “appearances are deceiving”. Professor Wade believes that crisis has not been averted, but only postponed: “When the government brought in the International Monetary Fund in late 2008 the IMF prescribed deferring the pain for a year. Now the pain is coming.”

But is such gloom and gloom justified? I have not followed Iceland closely, but my understanding is that its government did not bail-out the banks, although it did protect depositors – domestic depositors at least. With one exception, the government abstained from nationalising failed banks, taking them into receivership instead. This should translate into reduced costs for Iceland’s taxpayers, and most of those who stand to lose money – the creditors of failed banks – are foreigners. For this reason net public sector debt is projected to rise only modestly, to 40% of GDP next year, from approximately zero before the financial crisis.

Is Professor Wade’s forecast plausible? Time will tell. In the meantime, comments are open. Please enlighten me.

Update: Iceland’s parliament has agreed to pay more than 5 billion dollars to the governments of the UK and the Netherlands to compensate about 400,000 depositors who lost money in the Icelandic online bank Icesave. Payments will begin in seven years, and will be limited each year to a maximum of 6% of Iceland’s GDP. The government expects this concession to help it to get additional financial aid from the UK and the Netherlands. The governments of the UK and the Netherlands still have to ratify the agreement, but there is nothing in these developments so far to support a forecast of gloom and doom. More information is available here and here.